Netflix U.K. Debut Without ‘Downton Abbey’ Shows Local Grip

By Amy Thomson and Manuel Baigorri -
Dec 23, 2011

Netflix Inc. (NFLX), the video-streaming
service so popular in the U.S. that it has been blamed for
overwhelming the Web, may find itself boxed out of the most
coveted content in Europe’s $76 billion pay TV market.

In the U.K., a deal with broadcaster ITV Plc (ITV) probably won’t
include the most recent episodes of successful shows such as
“Downton Abbey,” a person with knowledge of the matter said,
asking not to be named because the talks are confidential. An
agreement with British Broadcasting Corporation this week allows
Netflix to offer shows such as “Top Gear” but only six months
after the broadcaster has aired them.

Netflix’s early entry in U.S. market helped the Los Gatos,
California-based company to become the biggest video-streaming
service, even spurring premium channels HBO and Showtime to
offer shows online. In Europe, Netflix will have to wrest
digital rights away from a cabal of powerful broadcasters who
own most of the popular content and have their own streaming
services.

“Broadcasters are controlling a lot of the premium,
online, video-on-demand business in the U.K.,” said Rio Caraeff, chief executive officer of Vevo Llc, a video-streaming
company backed by Vivendi SA (VIV)’s Universal Music and Sony Corp. (6758)
“They’re able to protect their television business by packaging
it with their online business.”

As with the BBC deal, Netflix may only be able to offer
some of ITV’s archived content, the person said. ITV declined to
comment. The BBC and Netflix named eight shows, including comedy
series “Fawlty Towers” and “Little Britain” in their Dec. 20
statement and spokesmen for both companies declined to name
other programs that might be part of the deal.

“The U.K. is a competitive market and we look forward to
offering the people of the U.K. and Ireland a great service with
fantastic content and ease of use,” said Joris Evers, a Netflix
spokesman. The company this month reiterated that it currently
doesn’t prepare to expand into European markets beyond the U.K.
and Ireland.

Market Domination

Lovefilm said on Dec. 21 it signed an exclusive deal with
Sony Pictures to offer titles such as “The Social Network” in
the U.K. Last month, Lovefilm announced a deal to offer Warner
Bros. films such as “Sex and the City 2” in the U.K.

BSkyB, the U.K.’s biggest pay-TV provider, has too much
market control because of its exclusive first rights to play
releases from major Hollywood studios, the Competition
Commission said in August. The watchdog said an investigation
may not be completed until early 2012.

The subscription TV market in Europe, Africa and the Middle
East, including pay-TV, video-on-demand, mobile and video-
streaming services as well as license fees, will expand 24
percent to $95 billion in the next four years, according to
PricewaterhouseCoopers LLP. Internet-streamed videos are
forecast to be the fastest growing segment.

Spanish Talks

In Spain, talks between Netflix and Antena 3 de Television
SA (A3TV) and other local media companies ended this year without a
deal as Netflix decided to focus on the U.K. and Ireland,
Francisco Sierra, a multimedia executive for the Spanish
broadcaster, said in an interview.

Netflix is “a company that really needs to try and sustain
a growth trajectory,” said Tony Wible, an analyst at Janney
Montgomery Scott LLC, Philadelphia, who advises selling the
shares. “In the U.S, you’re starting to see some concern about
growth.”

‘Arms Race”

Netflix lost 800,000 U.S. subscribers in the third quarter
after alienating some customers with changes in pricing and
subscription terms. The stock has lost 58 percent this year,
valuing the company at $4.1 billion. CEO Reed Hastings this
month likened the fight among online video companies for content
to an “arms race.”

Netflix will lose access in February to content from
Liberty Media Corp.’s Starz pay-TV business after the company
refused to charge customers a premium for Starz.

Phil Kent, CEO of Time Warner Inc. (TWX)’s Turner Broadcasting
System, said last month that he’s currently keeping digital
rights away from services such as Netflix.

Netflix, founded in 1997, had $365.8 million in cash and
short-term investments at the end of the third quarter,
according to data compiled by Bloomberg. The company, with 23.8
million subscribers at Sept. 30, raised $400 million with the
sale of stock and convertible notes last month.

In North America, online movies from Netflix and other
video services have become the top source of peak Internet
traffic, prompting AT&T Inc. (T) this year to place a cap on the
volume of data its customers can consume in a month. Netflix
accounts for 25 percent of Internet traffic at peak times,
network management firm Sandvine Corp. said in May.

‘Money to Burn’

In September, Netflix began selling subscriptions in Latin
America, boosting the number of countries where it operates to
43, including the Caribbean.

“Netflix’s strong cash flow means they have money to burn
and buy great content,” said Adrian Drury, who leads the media
team at consultancy Ovum. “But in Europe, Netflix will go head
to head with high-profile incumbents.”

RTL Group, Europe’s biggest broadcaster with 41 channels in
10 countries, told investors in May that it won’t license
content to companies such as Netflix unless it is allowed to
sell ads. RTL declined to comment.

“The big challenge in Europe is to intimately understand
consumers and to buy and offer the right content in each
market,” Drury said. “The execution risk is high and the
industry will be eagerly watching if they get it right. The race
is on.”